Question 4: The Worker Shortage of 2021. Restaurants, supermarkets, hotels, and other businesses that primarily employ low-skill labor claim that they cannot hire the number of workers they need. This is despite firms in many cases offering wages higher than their pre-pandemic wages. Furthermore, workers are quitting their existing jobs at record rates. See the Bloomberg article here, from which the following plots were extracted. See also this Washington Post article highlighting specific industries that have struggled the most to find workers. Record Openings Number of unfilled positions surged to record, hiring remained steady U.S. job openings 9286.0 -8000 6000 spuesnoyl -4000 -2000 Number of job openings - number of hires 3211.00 2000 spuesnoyl F-2000 '01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 '20 '21 Source: U.S. Labor Department Bloomberg Figure 1: Job Openings, 2001-2021 Labor Turnover The quits rate in the U.S. is at a record high as the economy reopens " Quits rate (SA) Quits rate at record -2.5 Rate (%) 1.5 Quits rate, leisure and hospitality (SA) Quits rate, transportation, warehousing and utilities (SA) " Quits rate, manufacturing (SA) 6.0 5.3 -4.0 3.3 2.3 '01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 Figure 2: Job Quits, 2001-2021 2Using the model of time allocation from the lectures, answer the following ques- tions. Note that your answer will be graded only on your ability to use the model from class. As always, the assumptions are not meant to perfectly repre- sent reality; they are (over)simplifying assumptions that make it easier to derive theoretical predictions. 4a. 4bh. 4c. 4d. de. Overview: If employment is lower but wage offers are higher than before the pandemic, would you conclude that the \"worker shortage\" of 2021 is driven by a reduction in labor demand or a reduction in labor supply? Would this imply workers' reservation wages are higher or lower? (Hint: No math is required here, but you should explain it clearly.) COVID-19 Infection Risk: One possible reason why workers may be less willing to work in a restaurant or other job with direct exposure to a large number of people is concerns about COVID-19 infection. Use our model of time allocation to show how COVID-19 risk would impact reservation wages and employment for workers in the restaurant indus- try. (Hint: Write down the definition of the reservation wage, assume P is unchanged, and think about what happens to the marginal utility of consumption in a pandemic.) Non-wage income: Some say that increased non-wage income transfers are responsible for the worker shortage, e.g., due to expanded unemploy- ment benefits and stimulus checks. Based on our model of time allocation, could an increase in non-wage income transfers to lower-income households in theory explain the \"worker shortage\" of 20217 If total non-wage income is smaller than the wage offer, could it still reduce labor? Non-wage income and worker types: Suppose low-income workers only differ from one another in their wages, but otherwise have the same utility functions and non-wage incomes. Suppose they all receive the same size stimulus checks. Which low-income workers would stop supplying la- bor when offered greater non-wage income through stimulus checks? What would happen to the average wage of the low-income workers who remain employed? Does this mean that an increase in average observed wages necessarily means that workers have gotten a raise? Household production technology: Some workers are said to be quit- ting their jobs because they enjoy working from home. A recent survey found that 40% of workers would quit their jobs if they had to return to the office. Suppose a costly investment is required to set up working from home, e.g., this paper found that there was a jump in purchases of home desks and chairs and this paper found a surge in patents for work-from- home technologies. Based on our model of time allocation, could home production investments made during the pandemic in theory explain the \"worker shortage\" of 20217 Why didn't workers already work from home before the pandemic? (Hint: This is a hard problem. Feel free to make it easier by using a simple utility function.)